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Many of you have probably heard the recent battle going on in New York City over having enough
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revenue to provide services that the citizens of the city need. Mayor Zoran Mondani has looked at
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a variety of different options. The latest is a tax on people who have a second home in the city,
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but that is bringing blowback from those individuals, one of which is Citadel CEO Ken
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Griffin. So is there a solution to try and raise revenue but do it in a manner that does not kill
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the tax base and see people either move out of New York or sell their second home? Robert Inman
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is a professor emeritus of finance at the Wharton School and he has written about a potential idea.
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Bob, great to meet you and great to talk and thanks very much for your time today.
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Oh, you're welcome, Dan. Happy to chat. Thank you. All right, so obviously revenue from taxes is a big issue. The article that you wrote
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talks about, or the components that you wrote about, talks about infrastructure and
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land being one of the areas that maybe cities should consider. Well, I agree. It's an idea that's been around for a long, long time,
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actually started by Henry George, who was a Philadelphian back in 1900. The basic idea when
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you do taxes is, and it's really quite simple, you want to do A, raise your money, and B,
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do the least damage you can to the private economy as you raise your money. The choices that the mayor has been given initially all really do have fairly significant
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effects on the New York City economy. And certainly, as you said, the blowback he gets
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with these alternative proposals, property tax being one of his earliest proposals,
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is going to have big, significant implications for one of the issues he cares most about,
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which is quality of housing and structure. When you tax property, people are going to
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take less time to maintain and repair their property. The other options are sales taxes,
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which of course is going to impact consumption, and then income taxes, which New York has been
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living with for a long time, and that's going to lead to impact on worker effort,
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and perhaps most importantly, people leaving the city for suburban living. In fact, I'll just
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quickly mention, Dan, because it was striking to me, New York introduced the wage tax back in 1969.
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Stanford, Connecticut, and Greenwich, Connecticut, were country commuting towns.
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Ten years later, they were major financial centers. And why is that? Because people who
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were doing finance wanted to avoid the wage tax. They moved out of the city and stayed close to job
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by recreating a new financial center in Stanford and Connecticut. So, when I teach this stuff to
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my students, I say, just drive on I-95, and you'll see the implications of the wage tax.
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All right. So, taxing the land, though, how does that actually kind of come about
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and benefit a city? One of the examples I saw talked about is Pittsburgh has been doing this
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for a long time. Yep. And with great success. Land is the one thing that can't move.
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So, there it is. And if you tax land or the value of the land, you can raise your money,
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but the land stays in place. And so, it's going to be, by definition, the one that does the least
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damage in terms of mobility to the economy. And Pittsburgh's been doing this now. It began
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in the late 1970s. There was a major recession in 1970, and Pittsburgh's money was badly squeezed.
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They were looking for new sources, and they made a decision. The tax structure in Pittsburgh,
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and which is true for New York as well, allows you to separate the tax rate on structures,
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buildings, bedrooms, bathrooms, and the like, from the tax on land. And what Pittsburgh did
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was to raise the land part of the tax and hold the structure part fixed. And that put more of
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the new burden of the tax onto land. The implication was, in the study that was done
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by colleagues at the University of Maryland, of the 25 or 30 Midwest industrial cities that
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they compared Pittsburgh to, Pittsburgh was the only city that grew from 1979 through 1995 when
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they completed their study. And why was that? Because the thing that was discouraging growth,
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taxes on structures, was now gone, or significantly less. And all new revenues came from tax on land,
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which couldn't move. And the implication really was, if anybody's been to Pittsburgh recently,
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a major transformation of the city. Yeah, it's kind of amazing to see what's happened to Pittsburgh
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in the last three decades or so. And obviously, by doing that, they've been able to provide all
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of the services that they need for the citizens there, correct? Absolutely. And importantly so,
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for the new businesses that were coming in, the IT from Carnegie Mellon, the medical centers from
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the University of Pittsburgh Medical Center, high-tech infrastructure kinds of buildings,
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which, by the way, are pretty mobile. But they had an incentive now to come into Pittsburgh
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because they were going to be taxed at a much, much lower rate relative to their alternatives.
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Are there any legal reasons, you know, in how the charters of New York City are set up
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that would prevent them from taking this approach? No. My colleague in our piece,
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Michael Knoll at our law school, Michael's an expert on the structure of tax laws. And
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New York does allow for the separation of tax rates on land and on structures. So you could
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have, just as a simple example, have a tax rate on structures that might be 1 percent,
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but a tax rate on land that might be 3 or 4 percent. And so you can separate the tax rates
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and get essentially the same effect that we're shooting for with a pure land tax.
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And there's no instance, realistically, where that tax kind of being incorporated
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into the component of the land gets passed down to the consumer down the road? No, because the easiest way for me to think about it is there's always somebody sitting
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on the fence to come in or come out. And a simple example would be, suppose I'm willing
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to pay $100 to be at this particular location to use this piece of land. And you tax, you say to me,
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the potential users of the land, I'm going to tax you $100. And I say, well, I'm going to leave.
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Well, the guy who owns the land was making $100 from my rents, subtracting his costs,
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he's making $80. So he could bear the burden of the tax. So the way I think about taxes,
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who can't leave is the guy who pays the tax. I'm the user of the land, I can leave,
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I can go to Connecticut. But the owner of the land is going to have to stay in place,
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and he eventually or she eventually will be the one who pays the tax. I should mention just quickly, you can design the tax so it isn't a tax on residential homeowners,
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but a tax on commercial property, industrial property, you can pick your taxpayer. And so
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it need not be a burden on the lower and middle income families of the city, but rather the
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industrial and commercial places. And that would just basically work off how the zoning is set up
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already in a lot of these communities, right? Exactly, exactly. So is there any reason why
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this approach hasn't been tried before in New York? In New York, I don't know the answer to that. I think more generally, the issue is
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administration of the tax seems complicated, because you're going to have to separate the
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value from the structure from the value of the land. But in the case of Pittsburgh,
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there was a lot of vacant land. And so you have a one building with a structure and one building with
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no structure, you have the value of the land right there waiting to be done. You can do it
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administratively and accounting wise, even if you don't have vacant land, but typically vacant land
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is the benchmark that you'll use. And the potential downside risk is obviously what we're
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seeing play out. It seems like with Mr. Griffin, who's talking about moving a lot of his offices
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for Citadel down to Miami, you're talking about the potential of losing a significant amount of
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revenue by going the route that Mayor Mondani is going rather than potentially looking at
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this avenue of taxing the land. Oh, absolutely. Because the owner of the land has an incentive
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to stay as long as the profits they make off owning that land is less than the tax.
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And you may as well stay in New York and continue to reap the benefits of the agglomeration
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advantages of the city. Right. Bob, great to talk with you. Thanks for your insight. All the best.
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Look forward to talking to you again. Great. Thanks, Dan. Thank you. Robert Inman,
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who is a professor emeritus of finance here at the Wharton School.